Aerospace Firms Fare Far Better Than Shipbuilders, Analysis Shows : Defense Budget Cuts Only Nick Southland

As the $2-trillion Reagan defense buildup fades into memory, weapons producers have been bracing in recent months for potentially devastating Pentagon budget cutbacks in fiscal 1989.

But a close examination of the federal budget released last week suggests that at least for the next year the aerospace industry will remain on strong footing. A half-dozen major programs that account for billions of dollars worth of industrial activity in Southern California emerged from budget cutting virtually unscathed.

The Pentagon has proposed spending $94.6 billion on the procurement of arms and related equipment in fiscal 1989, a 4.3% reduction from the current year’s program after adjusting for inflation. In the related area of research and development, the 1989 budget calls for spending $38.2 billion, a 0.3% increase after adjusting for inflation.

These small reductions are more than offset by the robust market that has developed for commercial aircraft produced on the West Coast. In addition, the budget for the National Aeronautics and Space Administration provides for stepped-up activity by major contractors.

“The budget was reasonably friendly to procurement,” said David Wyss, chief financial economist at Data Resources, an economic forecasting firm based in Lexington, Mass. “The aerospace impact does not look terrible. The Pentagon decided to opt for airplanes rather than ships. The Air Force won and the Navy lost.”

And yet, some aerospace executives still question whether Defense Secretary Frank C. Carlucci has cut back weapons programs too severely in favor of preserving troop strength and operations.

“Carlucci should be opting more to be sure that ammunition is there when he needs it,” said Ralph Hawes, General Dynamics’ executive vice president for missiles and electronics. “It is all well and fine to have well-trained troops, but it isn’t going to do any good if they don’t have ammunition.”

Indeed, the mood in industry is not confident because the 1989 budget proposal, which contained $33 billion in overall defense spending reductions, was just one in a long series of continuing cutbacks that could ultimately cause profound shrinkage in future years.

In a speech last month, Pentagon Comptroller Robert Helm said: “We’re probably looking at five or more years of real decline.”

The official Pentagon projection, however, calls for annual budget increases of 2% after adjusting for inflation. That would boost Pentagon budgets to $360.3 billion by 1993 from $290.8 billion in 1989.

Such long-term funding growth is necessitated by huge weapons programs that are scheduled to go from a low-cost research phase to a high-cost production phase. Critics charge that the Reagan Administration has “front loaded” the budget with such forced growth.

Ultimately, if that budget growth fails to occur, major programs will either have to be cut or significant reductions made in armed forces personnel.

While Southern California firms are not expecting a big downturn, modest layoffs will become more common over the next year and for the foreseeable future. TRW, Lockheed, Rockwell International and Hughes Aircraft have all had some layoffs in the past year. Although some of those layoffs resulted from the normal maturation of large programs, others were prompted by unexpected cutbacks on programs and by belt tightening in anticipation of lean budgets.

For the time being, however, the worst fears of aerospace executives have been allayed. Even with the moderate cutbacks, procurement spending has more than tripled in the past decade.

More Air Force Spending

Aircraft and missile producers emerged as the clear winners in the budget battle, while shipbuilders, concentrated on the East and Gulf coasts, took major hits.

In the significant category of aircraft procurement, the Air Force will increase its spending to $16.6 billion in 1989 from $12.9 billion in 1988, a 29% surge that will fund such programs as the McDonnell Douglas C-17 cargo jet, the Northrop/Lockheed Advanced Tactical Fighter and several classified programs.

“The Air Force has stuck with the plan for the C-17 in spite of the budget cuts,” said Robert H. Kinder, McDonnell Douglas vice president for program development in Long Beach. “That’s good. At this point, we are guardedly optimistic.”

The 1989 budget provides $2.1 billion in funding for the C-17 and $517 million for the firm’s T-45 trainer jet for the Navy. “From our point of view at Douglas, we see a better future than we have in a long time,” Kinder added.

Meanwhile, General Dynamics, headquartered in St. Louis, will experience a moderate increase in activity at its two divisions in Pomona and Rancho Cucamonga, Hawes said.

General Dynamics will be increasing production of its highly successful Stinger missile, recently credited with major Soviet aircraft losses in Afghanistan. Hawes said production of a new version of the missile is increasing to 600 from 200 missiles a month.

In addition, General Dynamics’ new Rolling Airframe Missile, which it developed in cooperation with a West German firm, is just entering production. The Navy plans to buy 5,000 missiles and the West German navy plans to buy 3,500, Hawes said.

No Program Casualties

Rockwell International of Pittsburgh, which has just gone through a painful reduction on the B-1 bomber program, expects relative stability from the 1989 budget.

“Our programs have been fairly well funded across the board,” said Sam Iacobellis, president of Rockwell International Aerospace Operations in El Segundo. “Our programs were funded without any casualties.”

Iacobellis noted that advanced development of the National Aerospace Plane, which will take off like an airplane and soar into orbit, was fully funded in the budget, along with a group of smaller programs.

Even Cleveland-based TRW, which recently went through a difficult layoff on a classified program, said its analysis of the 1989 budget produced no jarring surprises.

“The details we see do not provide any new information,” said Donald Kovar, direction of planning at TRW’s Space & Defense Sector in Redondo Beach. After looking at the budget, TRW expects flat to moderate growth, he added.

A TRW spokeswoman said the company has reduced its projection for the worse possible work force reductions to 2,000 jobs from 3,000 jobs. So far, the company said it has laid off 1,000 persons and could eliminate another 1,000 jobs through layoffs and attrition.

Hughes Aircraft, the largest aerospace employer in Los Angeles, said in a statement that it “would not be affected significantly by the proposed new budget. We would not lose any prime contracts, although some subcontracts would be reduced or canceled. Until we have had time to study the thousands of line items affected, it is difficult to say precisely what the impact would be.”

Meanwhile, officials at Lockheed headquarters in Calabasas declined to comment, apparently as the result of two significant reductions in their programs. Lockheed’s long-troubled Aquila drone aircraft, produced in Austin, Tex., was canceled. In addition, funding for the Trident II nuclear missile system, which is produced in Sunnyvale, was described by Pentagon officials as “austere.”

Los Angeles’ Northrop remains the most enigmatic of all the major aerospace firms in the region. Because more than half of its revenue is derived from classified programs, the budget yielded few clues about the future of its work.